Short tem loans are lending instruments offered by various crediting institutions for a set period of time, e.g. 60 days. The maturity date of the loan can be between 60 and 120 days starting from the date the loan was granted. However, short term loans given out by banks may have a term between 1 and 3 years, with the term depending on the borrowed amount and the lending institution.
Many loan providers require collateral but again, this depends on the borrowed amount. If the loan is smaller, the bank is less likely to request collateral. The application process may take some time as the creditor will look at the borrower’s credit history, making sure that he or she has the ability to repay the loan. If an individual applies, the lending institution will normally require pay stubs; with businesses, the cash flow history will be reviewed. In both cases, the credit core (the business credit score or the personal one) may be factored in deciding whether to grant the loan.
In general short term loans are suited for both, existing and new business enterprises. When creditors deal with new businesses, they will prefer to grant short term loans because these are less risky, compared to long term ones.
When applying for a secured loan, the creditor will require collateral such as equipment, property, or accounts receivable. If the business entity disposes of substantial assets and can use them to secure the credit, there is a good chance it gets a better term and interest rates. However, it should be noted that short term loans normally come with higher interest rates. Being usually fixed, these will not rise. Also, given the fact that the loan is to be paid off quickly, one will spend less on interest in contrast to long term loans.
Some people confuse business lines of credit with short term loans. In the first case, one pays off the balance and may borrow more when required. With the second instrument, the borrower receives a fixed amount of money, in the form of a lump sum. One cannot borrow more once the full amount is paid back.
The demand loan is a type of short term loan with maturity of up to six months. This borrowing instrument is atypical because it doesn’t have a fixed repayment date and carries a floating interest that will vary depending on the prime rate. The credit provider can call the loan for repayment at any time. In view of the credit history of the borrower, the demand loan can be secured or unsecured.